Avoiding Investment Fraud

I know a highly educated doctor of philosophy who got caught in one of the most common frauds in Utah. When I heard that he was investing in the “Iraqi dinar”; I did some research and found warnings on numerous web sites including the State of Utah’s. I called the gentlemen and gave him a summary of the fraud alerts and sent him the links to the various sites via email. Sadly, not only did he disregard the warning he continued to invest and went so far as to borrow against the equity in his home to invest even more. His family came to me upset and appalled. There was nothing any of us could do but watch him systematically wipe out his personal net worth and continue to store worthless currency in his basement.

Fraud is one of the most significant losses in the net worth of families in Utah. Some of the smartest people I know get “caught” in one scheme, scam or bad investment. Remember fraud captures our imagination because they first appeal to our greed and belief we are getting “fantastic” returns on our investment. I can only repeat what my own mother taught me over and over again; if it sounds too good to be true; it is! If there were really a way to earn15% or 30% on an investment “overnight”; Warren Buffet would be buying up the investment and there wouldn’t be anything left for us “little guys”.

Here are some other cautions you should heed when looking at an investment from someone you know or someone who knows someone you know.

Do your homework. The worldwide web is a great place to start looking. Research the investment strategy and research the person who brought it to you.

Talk to your Financial Advisor; if they review and like it; okay; but if they tell you its fraud and NOT to invest; be smart and listen to them.

If it involves property; go online to the County website where the property is located and check out the details on the county recorder’s site. Who really owns the property? Are there existing liens on the property that would take priority over your lien? And, by the way, never, ever, ever agree to lend on a property where you know you will be in second or third position unless you can buy out the first and second debt. Why? Because if you can’t and either of those loans default; you are wiped out.

Avoid someone selling you into a limited partnership where you don’t know any of the other members. If it really intrigues you then be sure to review the financials: cash flow statements; income statement; balance sheet and at least two years of tax returns. If that doesn’t even make sense to you; don’t invest.

If someone is trying to talk you into investing in a “start-up” company; do yourself a favor and just say “no” unless, of course, you are an expert in that field. If you are, then be sure to review the financials: cash flow statements; income statement; balance sheet and at least two years of tax returns. If that doesn’t even make sense to you; don’t invest. More importantly if the entrepreneur trying to get you to invest doesn’t understand any of those terms; don’t invest.

Never invest in the “heat of the moment”; give yourself two to three weeks to “think it over”. If the person “selling” the investment tells you there isn’t enough time and you have to decide "now"; then walk away.

I knew a very sophisticated and successful excavator who was talked into loaning $300,000 on some property in a county to the south of him. It was a friend that needed the money. The investment was to be secured by a “note and first trust deed”. He didn’t do his due diligence. Too late he learned that his loan was in third position on the property; not first. He also learned that the property was not worth the amount he lent. Worse he learned that if he bought out the first and second trust deed he would be indebted to the tune of $1,500,000 on a property worth $300,000. His money was lost forever.